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Monday, January 10, 2005

China : Neither Globally Competitive Nor Technically Superior!!

We have been covering in our blog developments relating to perceived chinese advances in industry - we wrote, China : No Big Force In IT Services. Its India All The Way and also covered Consumer Electronics : China Way Behind!! and emphasised that if at all there is leadership for chinese enteprises, they are mostly selective. The Economist has come out with an article emphasising that Chinese enteprises are neither globally competitive nor technologically superior Excerpts with edits and my comments added:

The contradictions at Huawei are mirrored to some degree by all of the country's emerging multinationals and ultimately reflect those of China itself. The economy is still in transition between dirigisme and free markets. Its political system can harness enormous resources, but ultimately undermines its own objectives in a paranoid desire to retain control. That China intends to create world-class companies is indisputable. The central government decided some years ago that 30-50 of its best state firms should be built into “national champions” or “globally competitive” multinationals by 2010. At home, these companies would enjoy tax breaks, cheap land and virtually free funding via the state-owned banks. Abroad, the government would help them to secure contracts or exploration rights.
In China, Lenovo's profits from PCs are rising by just 1% per year and its market share is being squeezed as Dell makes inroads in expensive computers and private-label firms undercut prices on basic machines. Far from being world-class, Lenovo is less efficient than its domestic peers, says Joe Zhang, an analyst at UBS in Hong Kong. Some put its early success down to good government connections—it is majority-owned by the Chinese Academy of Sciences.
Haier, having built up commanding domestic market shares of 20-70% for most home appliances, the group has offices in more than 100 countries and overseas revenues of over $1 billion. However, most of its international sales are in niche markets, and Haier lacks the cost control, production discipline, market dominance and sales support it needs to compete with foreign rivals outside China. Even at home it has had to resort to price wars to regain market share lost to better foreign products.
But the global footprint of Chinese companies is still rather faint
. Their outward foreign direct investment was just $2.9 billion in 2003, compared with the more than $50 billion that flowed into the mainland. China's stock of outward FDI amounts to $33 billion, less than half a percent of accumulated world FDI. These facts have led some long-term observers of the Chinese economy to the conclusion that China's industrial policy since the early 1980s essentially has failed. But one contrast is revealing: 20 years after the start of its rapid economic development a decade earlier, South Korea had built successful heavy industry groups and was beginning to lay the foundations for the technology and consumer brands people know today.If anything, the gap between Chinese and foreign firms is widening, as the latter merge, reinvest the profits yielded by their scale economies and continually hone their management systems.

Whereas policymakers in Japan and South Korea deliberately nurtured strong private companies (albeit often with close political ties), the Chinese government, deeply afraid of a politically independent private sector, implemented reforms that have given state firms privileged access to capital, technology and markets. But in order for the economy to grow faster, the central government has allowed foreign companies into China at a much earlier stage of its development and these now control the bulk of the country's industrial exports, have increasingly strong positions in its domestic markets and retain ownership of almost all technology. The result is a corporate landscape of a few big private companies such as Huawei, a mass of lumbering state-owned firms and increasingly powerful foreign multinationals. China's unreformed political system has a second unintended consequence. Like the bosses of South Korea's chaebol before them, Chinese managers respond to regulatory inconsistency and opacity by pursuing short-term returns and excessive diversification rather than by investing in long-term technological development. Most are unwilling to develop “horizontal” networks with customers, suppliers and trade bodies—which in other countries establish technology standards and foster confidence in long-term research. In China, a company's best defence against corruption and the direct political linkages that benefit rivals is often to avoid business collaboration entirely and instead build vertical links up the Communist Party hierarchy and curry favour with local bureaucrats. While multinationals import their most sophisticated business systems to China, improving productivity by 15% a year, Chinese companies still resort to “brute force”—throwing more labour and capital at problems, rather than thinking about new processes. Unless they improve, they do not stand a chance against world-class competitors, either outside their borders and soon not even on their home turf, warns Mr Orr of Mckinsey.For unless China institutes far-reaching political and structural reforms that give Chinese managers the confidence to invest in long-term technological development, it cannot readily build a globally competitive corporate sector.

Beauty is definitely more than skin deep!! Real thoughts to ponder!!
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